Pot Industry Insiders On Why The IRS Is Targeting Them—And How To Avoid Business Disruption

According to several sources in the Colorado cannabis industry, the Internal Revenue Service (IRS) has been trying to prove that marijuana businesses have been illegally trafficking in weed. This would mean they aren’t entitled to the tax deductions they have been claiming (see Author’s Note at the end of this article).

In its latest effort, the IRS filed a series of summonses that granted it access to Colorado’s seed-to-sale cannabis tracking system, with the expectation of finding evidence of these businesses claiming deductions on profits derived from the sale of pot—which remains federally illegal and a DEA Schedule 1 drug.

In response to these moves, several cannabis entrepreneurs have filed petitions in U.S. District Court to stop the IRS from obtaining state data related to these businesses’ sales and production. Many of these impresarios argue that the nature of this investigation is not tax-related, but criminal instead; if this were the case, the IRS would be overstepping its scope of action and going against the Cole Memo, which stipulates the federal government will not allocate assets to prosecute state-legal, compliant cannabis businesses.

However, judges have ruled in favor of the IRS, so far.

In an effort to better understand what’s been going on and what it means for the legal cannabis industry, Benzinga decided to reach out to a few companies in the space.

Geoff Doran is the co-founder of Tradiv, a company providing an online cannabis wholesale platform. He is calling for the state of Colorado to recognize that this is an intrusion in its affairs and to step up to protect the businesses it is allowing to operate within its borders.

“If fighting the IRS is daunting, even for the state of Colorado, perhaps creating a coalition of states with legal cannabis could generate enough leverage to push back the feds,” Doran suggested. “It’s really just going to take some creative thinking and legal teams beyond the resources of individual businesses to overcome these challenges.”

For his part, Micah Tapman, managing director of Canopy Boulder, a venture fund and business accelerator for companies developing ancillary products and services for the legal marijuana industry, said that, due to the complexities created by conflicting federal and state laws, the industry will probably experience “particularly tight tax enforcement from the IRS for the foreseeable future.”

While it’s true that a tax audit is never a desirable thing for a business, organizations in every sector of the economy should be prepared for one, Tapman said.

“Cannabis-related hypocrisy makes paying taxes particularly challenging,” Tapman explained. “General and administrative expenses can’t be deducted, and this leads some business owners to take particularly risky steps to minimize their tax burden, which in turn creates additional areas for the IRS to review and challenge. This negative cycle isn’t going away until the tax law is changed or the federal government legalizes cannabis.”

In the meantime, cannabis businesses will have to work extra hard to comply with every law applicable—including tax laws.

“Given this overall situation, it’s critical that business owners recognize the risk of violating tax laws and do their best to not only stay compliant but also survive an audit without undue hardship,” Tapman said. “Understanding that the IRS can and will use all available resources to validate revenues and expenses is part of being a professional entrepreneur, just like making sure your insurance is up to date or reviewing a new lease for unexpected pitfalls.”

He mentioned “some great companies now working to help cannabis-related firms stay on the right side of laws and regulations,” like Wurk, Compliant Cannabis, LoudCloud, Yobi, Simplifya, Park Pointe Financial and Modus Law.

“Professional insights from third parties can mean the difference in not just surviving an audit, but making sure it doesn’t disrupt your business,” he concluded.